Yen Improves Despite Strong US Data

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The Japanese yen has gained ground on Thursday, erasing most of the losses which marked the Wednesday session. In the North American session, USD/JPY is trading at 112.41, down 0.45% on the day. In economic news, unemployment claims plunged to 222 thousand, well below the estimate of 240 thousand. There was more good news, as the Philly Fed Manufacturing Index jumped to 27.9, crushing the estimate of 21.9 points. On Friday, the US will release Existing Home Sales and Fed Chair Janet Yellen speaks at an event in Washington.

Who will replace Janet? The markets are keeping a close eye on who will replace Janet Yellen as head of the powerful Federal Reserve. Yellen is due to finish her 3-year term in February 2018. Yellen is apparently interested in serving a second term, but President Trump likely has other ideas. Trump has not been complimentary towards Yellen, although it's hard to argue that Yellen has done an admirable job. Yellen has ended quantitative easing, raised interest rates and started to unwind the Fed's balance sheet. Trump's shortlist includes Jerome Powell, Kevin Warsh and John Taylor. Trump may lean towards Taylor, an economist who is considered more hawkish on policy than Yellen. Under Taylor, interest rates would likely move substantially higher than the current 1.25%, and a rate hike early in 2018 could strengthen the US dollar.

Japan's economy has impressed in 2017, and an important reason for the rebound has been the manufacturing sector. Manufacturing indicators are pointing upwards and recent polls are pointing to strong optimism among manufacturers. A Reuters poll released on Tuesday showed that manufacturer confidence in October was at its highest level since 2007, echoing a Bank of Japan survey taken earlier in October. Automobile and electric machinery exports remain strong and have helped boost the manufacturing sector. The BOJ holds a policy meeting on October 30-31, at which time it will set interest rates and will also publish its long-term economic and price forecasts. We can expect the economic forecasts to be more positive than the inflation projection. With the BoJ forecasting that inflation will not reach 2 percent until fiscal year 2020, it's a safe bet that the bank's accommodative policy will not be tightened any time soon.

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